UK Office of Fair Trading says no to payday loan rate cap

A T-shirt parody of the "Enjoy Coke" logo. This shirt reads "Enjoy Capitalism." Part of capitalism is a free market economy that would not restrict the payday loan with unnecessary (or even harmful) rate caps.

Enjoy capitalism. Payday loan customers do. (Photo: Flickr)

Payday loan rate cap laws have circulated in various forms through the halls of state-level politics in the U.S. for years. However, not all countries that allow payday lending to serve consumers in need of easy loans are so eager to institute a rate cap that could stifle the natural price controls present within a free market economy. The Guardian newspaper reports that the UK’s Office of Fair Trading (OFT) has found that an interest rate cap on payday lending is unnecessary, claiming that a lack of competition would harm that sector of the financial marketplace.

Payday loan competition not perfect, but works ‘reasonably well’

Access to easy loans and other forms of consumer credit that fall under the general payday loan banner is important for credit-constrained consumers. The OFT recognizes that market competition has helped regulate payday loan prices. The level of competition between easy loan outlets may not be as effective as it could be, but the OFT is confident in their assessment that payday lending markets work “reasonably well.” Despite resistance from the Archbishop of Canterbury, the Financial Inclusion Centre and the debt charity coalition Debt On Our Doorstep, the OFT concluded that the payday lending market did not need a more stringent rate cap. However, the OFT did recommend further investigation into how an industry-wide “code of practice” could be instituted for the UK payday loan industry.

Finance & Lending Association agrees with OFT decision

Fiona Hoyle, Head of Consumer Finance for the Finance & Lending Association, told The Guardian that a payday loan rate cap “would have adverse unintended consequences for consumers, including for the cost and availability of credit.” If governments follow the Office of Fair Trading’s lead regarding rate caps – and take note of the Dartmouth University study in the U.S. on the effects of payday loan rate caps in Washington and Oregon State – perhaps they’ll see just how maintaining competition can aid the consumer while still allowing easy loans outlets to reasonably profit.

Simply clamping down isn’t the answer

Marie Burton, financial services specialist at the consumer group Consumer Focus – which operates independently from the payday lending industry – told The Guardian that the OFT has exposed just how hard it is to both promote competition and help drive down consumer cost. While that is the ideal, additional research into the workings of the short-term consumer finance industry in the UK may be necessary. Pulling banks and credit unions into competition by encouraging them to offer low-cost, low-hassle payday loan products would be most ideal for the free market, although banks and credit unions have failed at this before, considering America’s example.

Sources:

The Guardian

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